Validation of Sri Lanka Country Partnership Strategy Final Review, 2016–2021

This validation covers Asian Development Bank’s (ADB) support for Sri Lanka during 2016–2020. It includes ongoing and completed ADB loans, grants, and technical assistance (TA) from 2016 to 2020. The validation aims to identify lessons and recommendations for ADB’s future operations, in particular the forthcoming Sri Lanka Country Partnership Strategy (CPS), 2023–2027. 

The validation assesses the ADB program successful overall. It was relevant, efficient, effective, with satisfactory development impacts, but less than likely sustainable. The validation assessed the program less than sustainable given Sri Lanka’s negative fiscal situation, declining revenue, and increasing debt burden. 

The validation recommends that ADB take the following four actions:

• Prioritize fiscal reform and public financial management in the next CPS. Declining revenue, high recurrent expenditure and debt servicing obligations have limited Sri Lanka’s ability to provide essential public services and social welfare. In the aftermath of COVID-19, the government’s fiscal constraints have further constrained recovery efforts. ADB needs to be ready to support recovery efforts in partnership with other international financial institutions while making sure that fiscal reform will be one of the government’s key priorities.

• Enhance coordination with an expanded development partner community to address debt issues. As one of the largest lenders, ADB should play an active role in supporting government efforts to improve debt sustainability and promote responsible and sustainable lending among all development partners. ADB should help the government develop sustainable sector plans and policies that can guide government and other development partners’ support. ADB must be proactive in establishing communication with all development partners.

• Intensify support for private sector development. ADB should aim for greater synergy across sovereign and nonsovereign operations to support private sector development more effectively. Nonsovereign operations should be broadened beyond the financial sector. Given the difficulty of finding potential private sector clients, ADB may need to actively create demand and value added by investing in upstream activities and policy reform.

• Maintain flexibility in ADB country program and support. Given its current fiscal and debt-related issues and the challenges of post-pandemic recovery, Sri Lanka’s economic outlook is uncertain and government development priorities may change. ADB needs to retain flexibility in how it responds to the country’s needs over the short to medium-term. This may involve being ready to support a package of macroeconomic reforms along with other development partners, as well as to compensate for any social welfare losses over the immediate term.